What is interest?

    In finance and trading, interest is a fee paid by a borrower of assets (or debtor) to the owner (or creditor) as a form of compensation for the use of the assets. In economics, interest is considered the price of credit.

    It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds.

    When money is borrowed, interest is typically paid to the lender as a percentage of the amount owed to the lender. This percentage is called the interest rate.

    Interest is compensation to the lender, for …

    • … the risk of principal loss. This is called credit risk.
    • … forgoing other investments that could have been made with the loaned asset or money. This is called opportunity cost.

    The borrower enjoys the benefit of using the assets ahead of the effort required to pay for them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege.

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